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Alberta Royalty Reduction Starts Six Weeks Early

The Alberta government took steps last week to ensure that royalty reductions announced late last month will light a fire under the current drilling season by putting the program into effect six weeks early, as of the announcement date Nov. 19.

The move caters to the seasonal rhythm of the Western Canadian industry. Each year a large majority of drilling takes place in late fall through early spring, when soft and swampy northern terrain freezes hard enough to support heavy equipment on bush roads and backwoods well sites.

Industry participants told the government the initial starting date for its reduced "transitional" royalties -- Jan. 1 -- jeopardized the 2008-2009 drilling season. The government said last Monday the cuts will be granted to all wells where preparatory and drilling work commenced after Nov. 19. The Alberta government first announced last month that it would scale back its controversial royalty rate plan for natural gas and oil producers, citing job losses and lower energy prices (see NGI, Nov. 24).

The transitional scheme postpones for five years full effects of a new Alberta royalty policy adopted during a time of high oil and gas prices in late 2007. The biggest change reduces maximum royalty rates on new natural gas wells to 30% from 50%.

The province forecasts that the changes will restore about C$1.8 billion (US$1.4 billion) in industry revenues, but adds the amount will depend on prices and production. Under the transition rules, as under the previous and eventual new regimes, Alberta royalties are assessed on complex sliding scales that set a wide range of rates that change over time depending on well productivity and prices.

The softening of the new regime's initial impact by the transitional rate policy has won praise from the Small Explorers and Producers Association of Canada and the Canadian Association of Petroleum Producers, which have said it is likely to increase field activity.

But industry analysts are continuing a long resistance campaign, predicting that investment and drilling will migrate from Alberta. AJM Petroleum Consultants, for instance, fired off a statement saying the only way Alberta can restore momentum to field activity will be to match new incentives in other jurisdictions such as British Columbia (BC).

The BC government recently enacted a natural gas version of Alberta's favorable regime for the oil sands. Details of the scheme, which is aimed at unconventional drilling, led by emerging shale gas drilling in northeastern BC, remain under discussion between industry and government officials. But in general the BC plan cuts royalties to a token single-digit share of production revenues until development costs are paid off. Then the system will levy a graduated scale of rates only on net after-expenses revenues rather than on gross production revenue. Industry has sought a similar system for gas in Alberta for years without success, with provincial leaders pointing out that the government already offers special incentives for deep drilling and more shallow programs involving multiple low-productivity wells.

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